The Effects of Environmental Risk Information on Auditors' Decisions About Prospective Financial Statements
Posted: 25 Jun 2004
Abstract
This study tests a model of how auditors make decisions when presented with environmental risk information in the context of a task that requires their professional opinion on a company's forecasted information. Auditing provided a small world context where declarative and procedural knowledge have been well documented in terms of the rules for analyzing financial information. This research uses a conceptual modeling approach to determine auditors' perceptions of environmental risk information and the effects on their judgment and decision choices when issuing an examination report supporting forecasted financial statements. Auditors were provided with environmental risk information that they had to process and integrate in their decision making. The results demonstrated that auditors act on unfamiliar declarative knowledge using their standard procedural knowledge. The results from eighty-four senior auditors evidenced that auditors' perception of environmental risk information is downplayed compared to the traditional accounting information during their judgment and decision choice phases. When confronted with conflicting information, auditors tend to place more reliance on financial rather than environmental risk information. One of the implications of this study is that auditors should be trained to handle non-traditional information, such as environmental risk.
Keywords: Environmental risk factors, judgment, causal modeling
JEL Classification: M49
Suggested Citation: Suggested Citation